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Daniel J. Disimile, CFP
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January 15, 2012 FIRST QUARTER COMMENTS

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WALK On The WILD SIDE

The S & P 500 began 2011 by rallying 8.4% and hit a three year high by May. It then dropped 19% before hitting bottom October 3. From there, it rebounded 7%, over the next 7 days and finished the year flat.

2011 was a volatile year. The Euro collapsed, and the earth trembled in Fukushima and the Middle East. The dollar was not devalued and survived as reserve currency. We did not default on our debt, although our credit rating was downgraded. Interest rates and inflation remained low, and the government easily
raised $177 billion in December, paying a rate no higher than 2.95% on 30 year paper.

Although our market was flat, U.S. corporate operating profits increased 17% and could grow another 7% this year. For five decades, the S & P 500 has traded at 15.5 times earnings on average, and the ten year bond has yielded 6.7%. Currently, the index trades at 12.5 times earnings, the ten year is yielding 1.88%.

Current cash holdings exceed the total value of all U.S. equities. The amount of stock owned by hedge funds is lower now than in March 2009. Most household savings are at the money rate, and if confidence were to return to both business and the consumer, this fourth year of the bull market could be very rewarding.

VICIOUS CIRCLE

The economy is growing at a rate slightly higher than the 1930’s. Chronic unemployment and housing is worse than during the Great Depression, and 46 million Americans are in poverty or relying on food stamps. Unemployment has exceeded 8% for 35 straight months, and black unemployment is at a 28 year high, along with the misery index. Home ownership is at its lowest rate since 1965, and the smallest portion of the population is working since 1983.

In 1928, the Federal Reserve raised the discount rate four times. Within 3 years, the money supply contracted 30%. From 1933 to 1936, federal spending increased 83%, the federal debt rose 73%, and the top income tax rate was 90%. By 1938, the New Deal had produced the nation’s first depression in a depression, and it took a World War for the economy to recover.

Wealth must be created before it can be redistributed. This happens best without government interference. The 1% earns 20% of the nationwide adjusted gross income, and pay 38% of the federal income taxes for the remaining 99% because they took the risk, worked hard, competed and achieved. What the gullible and envious do not understand is that individual freedom leads to prosperity, and there is no such thing as utopia.

“I favor tax cuts on economic grounds because it enables the ultimate consumer, the ultimate individual you and me, to decide how the money should be used. It makes no sense for me to send my money to Washington to have somebody in Washington decide how to use it. I’d rather decide how to use it myself, whether for charity or for welfare or for other purposes. So that’s the first and most important argument. But the political argument for it is that it’s the only way to keep Congress from spending it.”

Milton Friedman, Nobel Prize Laureate in Economic Sciences, 1976


LONG-TERM REAL GROWTH IN US GDP PER CAPITA 1871 - 2010

ECSTASY

Significant reductions in taxes create prosperity.

3 years after World War I, unemployment was 11.7% and the top income tax rate was 77%. Tax cuts led
to the Roaring Twenties when GDP grew 4.7% for seven years, and unemployment fell to 3.2%.

3 years after World War II, civilian plants had closed and the military discharged 12 million people. The 1948 tax cuts led to the Fabulous Fifties where the GDP grew 4.5% on average, for six years.

7 years after the 1962 tax cuts, the economy grew 5% on average. Total tax revenue increased 62% and
the Sixties became the greatest decade of economic growth in U.S. history.

7 quarters after the 1982 tax cuts, the economy grew 7.1% on average. Over the next 7 years, 4.3%.
Total tax revenue increased 99.4% and by 2007, 43 million jobs and $30 trillion in wealth were created.

After the 1995 tax cuts, GDP growth averaged 4.5% from 1996 to the middle of 2000.
After the 2003 tax cuts, 8.1 million new jobs were created by December 2007.


TOP MARGINAL TAX RATES: 1916 - 2011

BERLIN

After complete devastation following World War II, the Germans reduced tariffs, expanded free trade, and lowered taxes. From 1950 to 1960 their standard of living doubled. They spent $2 trillion to rescue their eastern brethren from communism, without help. Today, they are trying to rescue their southern neighbors from regressing to a living standard they last saw half a century ago.

For a country to grow, it needs people to work, consume and pay taxes. When these people die, they
need to be replaced, either through birth or immigration. Without people paying taxes, the money to support three decades of health care and retirement benefits must be borrowed. Regulators allowed Eurozone banks to leverage 40 to 1 on sovereign debt but many of these countries are in net population declines. If there are no children to pay today’s debts, tomorrow, lenders will stop lending.

Germany will lose 30% of its working-age population in a few decades. They have the highest proportion of childless women in Europe. A recent poll found 16.6% of Germans stating none is the ideal number of children. In the U.K., Sweden, Finland, Austria, Switzerland, and the Netherlands 20% of the 40 year old women are childless. 60% of 30 year old Spanish women are childless. In Greece, there are 42 grandchildren for 100 grandparents and in Italy, 1.2 children per couple.

The Eurozone has become a no growth, overly regulated, undemocratic, and inefficient, innovation
stifling economy, with too many languages, cultures and economic interests, too few people, and too much debt.


HANG On To YOUR EMOTIONS

If the rich paid 3% to 4.6% more income tax, the 2010 federal budget deficit would have dropped from $1.29 trillion to $1.21 trillion. If all tax breaks for oil companies were eliminated it would cover less than half a day of federal spending. If depreciation were denied to the owners of corporate jets, for 100 years, it would cover less than one month of Medicare spending. Class warfare helps no one.

The U.S. has become the most powerful nation the world has ever known because of free enterprise and capitalism. Over the last 100 years, the world has seen a greater reduction in poverty and increase in life expectancies than in the previous 100,000 years. Free market capitalism allows the poor to become wealthy, something being acknowledged by the central planners of those socialist and communist states who have yet to fall onto the ash heep of history.

What fails to occupy the mind of the class warrior is any real knowledge and understanding of human behavior, history and economics. Free people, making voluntary decisions, motivated by their individual needs and desires has created the prosperity in the modern world, not any centralized system of authoritarians imposing their dictates to organize the economy, for the good of masses.

GUARDIAN ANGEL

Financial planning: process of meeting your life goals through the proper management of your finances.
Certified Financial Planner Board of Standards

Estate Tax Planning for 2012: An individual may gift $13,000 without incurring any gift tax liability. The gift tax exemption is $5 million per person, and the top rate on gifts over that amount is 35%.

Stocks Carry Higher Risk and Rewards: From 1926 to 2010, large cap stocks returned an average, annual 9.9%; small cap stocks returned 12.1% and long term government bonds 5.5%.

Tax Benefits of Rental Property: Since depreciation is deducted on investment property, this noncash expense can turn an operating cash profit into a tax loss, and allow one to pocket tax free cash.

Power Of Compounding Builds Wealth:
A 25 year old saving $5,000 a year, earning 7% annually, will have $1.07 million by age 65.
Saving $3,000 a year in a tax deferred account will grow to $97,010 in 15 years, assuming a 9% return.

Financial advisors are a top source of financial guidance for 63% of mass-affluent Americans, according to Bank of America. 50% of those surveyed said receiving advice from a qualified advisor, has increased their confidence in their ability to meet their financial goals.

 

 
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